Faculty Q&A: Cents and Sensibilities

When we talk about a minimum wage increase, what are we really talking about?

The US federal minimum wage is not very high—it’s much lower in real terms than it has been for much of the last several decades—and it’s hard to argue that a mild increase in a low minimum wage would cause a lot of unemployment. Nevertheless, a minimum wage increase is controversial. Why is that? Because the conversation is really about much more than a technical debate on the costs and benefits.

Most people are aware that the long-term economic path for the United States has some challenges. Spending outstrips our forecast for revenue by an enormous amount and that requires some adjustment. We’ll have to either raise taxes or cut spending. People don’t always understand the technical details of these policies, but that’s really not the point. The point is: People are debating much bigger questions. What do we want this society to be like?

This year we’ve seen debates about the minimum wage at the city and state level. Why?

States and cities are always competing—for business, for talent, and so on. These regions and cities are trying to decide what kind of regions and cities they want to be. California is a good case study. A few years ago, California was in complete crisis, fiscally. One option was to become a more “competitive” state—lower taxes, lower spending, “lean and mean.” The other perspective was, “No, that’s not who California is.” They decided to raise taxes and to continue to support a wide set of public goods, including support for the poor.

Your research is ultimately hopeful about finding a middle ground on issues like the minimum wage and tax policy.

You can think that people have only crude knowledge about the minimum wage and that they get it only from screaming people on TV and, to some extent, that’s true. But on the other hand, there are people screaming on TV about the minimum wage. It may be a good sign that Americans have discussions with that kind of passion about what might seem like dry policy issues. At the same time, in reality, most normal people who do not have microphones find both sides somewhat right. Much of my recent research on tax policy, where the same tradeoffs are at stake, has shown that most people are sympathetic to the logic behind progressive taxes and, simultaneously, the logic behind flatter taxes. The policies we see, whether tax rates or the minimum wage, reflect the public’s efforts to find the right balance between these competing arguments. That may not be pretty, but it makes me hopeful.

How do people make decisions about these big economic questions?

Economists have a very good way of thinking carefully—scientifically, you might say—about the mechanical effects of an economic policy. We are not very good at thinking about the broader value judgments underneath those decisions.

What part does the minimum wage debate play in larger policy discussion about income inequality?

We know that income inequality has been rising dramatically over the past several decades. If rising inequality is a signal that more people are falling too low, the minimum wage feels like it is a way to provide a floor below which no family can fall. But that’s not always true, because people don’t always have jobs. If you want to provide this minimum floor because you are worried about widening inequality, you can’t just have a minimum wage increase, you also have to have tax policies that address income inequality more broadly.